Coeur Mining: A Bargain Play On Higher Silver Prices

Aug. 5.14 | About: Coeur Mining, (CDE)

Summary

CDE's recent losses are mostly on paper, and it trades far below its asset value.

CDE's growing gold production is an excellent hedge against low silver prices.

CDE's balance sheet portends a major surge in stock prices when silver prices recover.

Today, we're going to be taking a close look at Coeur Mining (NYSE:CDE), the largest US-based company primarily engaged in silver mining. Their stock price has seen better days, falling from over $30 per share in late 2012 to around $7.50 per share today.

I'm going to be taking us through an overview of Coeur Mining's fall from grace, their staggering FY2013 losses, and what their balance sheet says about investing in them at the current levels.

Coeur Mining: A primer
As mentioned, Coeur Mining is primarily engaged in silver mining, but that is no longer their exclusive business. Though silver remains the lion's share of revenue generation, the company has branched off into gold mining, with the Kensington underground gold mine in Juneau, Alaska, producing 114,821 ounces of gold in FY2013.

Still, silver is the big play here, with 43% of Coeur's revenue coming from Coeur Mexicana, a wholly-owned subsidiary which operates the Palmerjo mine. Between Palmerjo and two other mines - the San Bartolome mine in Bolivia and the Rochester mine in Nevada, Coeur produced 17 million ounces of silver at an average price of $9.84 in 2013. The remainder of their production was 262,217 ounces of gold at $950 per, and some relatively small royalty interests elsewhere.

In addition to these active revenue streams, Coeur Mining also has interests in the La Preciosa project, a silver and gold mine in Mexico, and the Joaquin deposits in southwestern Argentina. Both show some promise, though neither seems likely to begin production in the near-term unless the price of silver recovers.

2013: A big loss on paper
Coeur's dramatic fall from $30 per share to $7.50 per share is not by accident. Rather, the price secured for silver in 2012 was $30.92 per ounce, and it dropped to $23.14 per ounce in 2013. With the price of silver now down to $20.30, that fall from favor is in many ways well-justified.

From FY2012 to FY2013, Coeur Mining went from a profit of $0.54 per share to a loss of $6.65 per share. That sounds staggering, but most of this loss was because of amortization and write-downs of paper assets, not actual losses on the balance sheet. The net loss in Q1 of 2014 was a more modest $0.19 per share, better than consensus estimates, though with the price of silver still low, more losses are to be expected.

The Balance Sheet: Assets at a discount
Let's put aside the paper losses, and rather focus on the balance sheet of Coeur Mining. Despite the big FY2013 losses, the current side of the balance sheet has actually improved quite a bit since 2012, with cash and equivalents growing from $125 million in 2012, to $206 million in 2013, and $273 million at the end of the first quarter. Current assets overall have grown from $406 million in 2012 to $653 million today, while current liabilities have shrunk from $238 million to $140 million.

That's an encouraging sign, and it's just part of the story. In addition to the current assets, Coeur Mining has $476 million in mining equipment on the books, and $1.7 billion in property. That's $2.98 billion in total real assets compared to $1.15 billion in total liabilities.

That is the real hidden value in Coeur Mining, a net $1.83 billion in real assets above liabilities, available at a huge discount since the current market capitalization of the company is just under $800 million.

The losses and the interminable waiting
The reason these assets can be had at such a substantial discount, of course, is because they're producing revenue, but not profitably. Current silver prices make it difficult to envision Coeur Mining making a substantial profit at all, and no investor should go into this company expecting a rebound with a commensurate rebound in silver prices.

That said, the decision to move into gold mining at Kensington was an extremely good one for Coeur Mining, as gold has retained its price much better than silver over the past two years. The tangible losses the company suffers right now are much smaller because of this gold backup, and when an old royalty deal on gold out of the Palmerjo mine expires, likely in early FY2015, it will only help the bottom line.

Conclusion
As I said, investment in Coeur Mining only makes sense as an investment in the recovery of silver prices. I don't pretend to know when silver will rebound, and the silver market's oft-illogical behavior means it could be a frustrating wait.

It may make more sense for the risk-averse silver bugs out there to buy something like iShares Silver Trust (NYSEARCA:SLV), on the idea that at the very least one is not buying assets, however discounted, that are producing losses.

That's a case to be made, and my own portfolio contains both SLV and CDE for exposure to higher silver prices. The reality, however, is that while a $10 increase in the price of silver will net one only a 50% increase in the value of iShares Silver Trust or similar investments, the return to meaningful profitability would ignite a major fire under Coeur Mining's shares, and the days of trading at less than half of their asset value would end overnight. A doubling, or even tripling of Coeur Mining in the event of $30 silver would not be unexpected, and that is the real reason to recommend them over direct investment in silver.

There is simply no better way to get huge upside potential on the recovery of silver prices than with this miner, so deeply discounted over the past 18 months.

Disclosure: The author is long CDE, SLV. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.